Investors, like gamblers, have always been faced with the question, “What potential loss are you willing to endure in pursuit of longer-term gain?” Unlike gamblers, who, as a group, have a long-term history of losing to the house, stock market investors, as a group, have a long-term history of positive total returns.
2016 started out with stock market declines around the globe. There are many explanations being offered, including these:
- Collapsing oil and commodity prices (which can be net positives for most consumers and many companies),
- The Fed raising interest rates by one quarter of one percent (which had been anticipated for over 12 months),
- China’s economic slowdown (GDP growth still over 6% annualized if you trust their calculations), or
- The Iowa Hawkeyes’ disappointing Rose Bowl performance on January 1st (OK, that’s a stretch, but for those who proudly wear the black and gold, it was painful)
No matter what story or stories you subscribe to, the result of these opening weeks of 2016 have been eye-catching, in a negative way, for stock market investors. However, what has made this year’s decline feel particularly bad may not be due as much to the actual percentage decline (less than 6% for the US stock market at the date of this writing, February 24, 2016), but the timing of the loss occurring at the very beginning of the year.
In years when the US stock market has either seen a period of gains or more modest declines in the first part of the year, investors have some mental cushioning to help buffer declines occurring later in the year. Think of it this way; in 1998, the S&P 500 had risen 16.46% by the end of July. In August of 2008, the S&P 500 declined 14.46% due, in part, to a Russian financial crisis and debt default. Certainly, that kind of decline was nerve rattling. But investors had already banked 16.46% and so were still showing a positive return for the year. For those investors who stayed invested for the entire 12-month period, the S&P 500 returned an historic 28.58%, rising 26.82% from August 1st through December 31st.
The graph “Some Perspective” reveals that every year US stock investors have endured periods of decline during a portion of the year in pursuit of what, hopefully, will be a positive year overall. When we think about this, of course, we know it is true, because the US stock market has never gone up every single day over the course of an entire calendar year. There have been, and investors should expect there always will be, some relative declines, whether it be for a day, week, month or even longer.
The actual historical data shows us that since 1980 the S&P 500 has averaged an intra-calendar-year decline of 14.2%. However, the average annual return for an entire calendar year was 12.9%. So even though the US stock market, as measured by the S&P500, was down by as much as 11.44% from January 1st of 2016, that still qualifies as a lower-than-average “intra-year” decline and, based on history, would certainly not preclude an “average” overall stock market experience for 2016 which, since 1980, has been a positive return to the investor of 12.9%.
Please Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance of his/her account will be profitable, or equal any corresponding historical index/benchmark referenced above. The historical performance results for the comparative indices reflect reinvested dividends, but do not reflect the deduction of an investment management fee, which would have the effect of decreasing indicated historical index performance results. The historical performance results are provided exclusively for comparison purposes, to provide general comparative information to assist an individual client or prospective client in determining whether a certain type of asset allocation meets, or continues to meet, his/her investment objective(s).
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